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How Entitlements Influence When People Retire

Workers have a variety of strategies for deciding when they will retire. Eligibility for various forms of retirement benefits, especially Medicare and Social Security, often plays a key role in the decision-making process. Here is how workers are determining the best age for retirement:

Medicare eligibility. Many workers, especially those without retiree health insurance from a former employer, decide to retire when they first become eligible for Medicare at age 65. Workers without access to retiree health insurance at work are 7.5 percentage points more likely to retire soon after their 65th birthday, according to a recent Center for Retirement Research at Boston College analysis of Health and Retirement Study and Social Security Administration data. These workers are also 5.8 percentage points less likely to delay retirement past age 65 than those with retiree health insurance. "We find that individuals without access to retiree health insurance are more likely to retire at age 65, and less likely to postpone retirement until their full retirement age," according to the report. "We interpret these findings as suggestive evidence of a Medicare-eligibility effect on retirement behavior."

Social Security eligibility. Workers first become eligible to claim Social Security payments at age 62, and more than half of retirees sign up right away, even though monthly checks are lower if you begin payments at this age. There's also a penalty if you are employed and claim Social Security simultaneously. People who work and claim Social Security at the same time who are younger than age 66 in 2013 can only earn up to $15,120 before part of their Social Security benefit will be temporarily withheld.

Social Security full retirement age. Individuals used to be able to claim the full Social Security payout they had earned at age 65, the same age when Medicare eligibility begins, but that's no longer the case for anyone born after 1937. The full retirement age was gradually increased in 2-month increments from 65 and 2 months for people born in 1938 to 65 and 10 months for individuals born in 1942. And the full retirement age is 66 for baby boomers born between 1943 and 1954.

As the full retirement age has increased, there has been a spike in Social Security claiming at the new age, according to a Congressional Budget Office report. "That delay occurred in part because the full retirement age acts as a signal about when to claim benefits and also because the increase in the full retirement age meant that if a person started collecting benefits at age 65, those benefits would have been smaller than they would have been without the increase in the full retirement age," writes Joyce Manchester, chief of the health, retirement, and long-term analysis division of the Congressional Budget Office. "As a result, people tend to work longer on average when the full retirement age increases."

Future increases in the retirement age. Under current law, the Social Security full retirement age will further increase in 2-month increments from 66 and 2 months for those born in 1955 to 66 and 10 months for people born in 1959. And the full retirement age is 67 for everyone born in 1960 or later. The Congressional Budget Office is forecasting that older people will respond to this older retirement age by delaying retirement and working longer. CBO projects that the rate of labor force participation among people ages 65 to 69 will increase from about 37 percent in 2012 to approximately 41 percent in 2022 among men and from 28 percent to about 32 percent among women over the same time period.